Penney drops as analyst cuts rating, price target

This image provided by J.C. Penney shows the company's new advertising campaign. Penney is still embracing its “fair and square” strategy as the cornerstone of its reinvention plan, and says the promotions will be targeted. But the latest tactic acknowledges that middle-income shoppers can't be weaned off sales. (AP Photo/J.C.Penney)

This image provided by J.C. Penney shows the company's new advertising campaign. Penney is still embracing its “fair and square” strategy as the cornerstone of its reinvention plan, and says the promotions will be targeted. But the latest tactic acknowledges that middle-income shoppers can't be weaned off sales. (AP Photo/J.C.Penney)

FILE - Shoppers walk in a parking lot outside of a JC Penney story in Plano, Texas, in this June 19, 2012 file photo. J.C. Penney Co. is reporting a bigger-than-expected loss and plummeting sales, as its customers continue to be turned off by a new pricing plan that gets rid of hundreds of sales in favor of every day lower prices. (AP Photo/LM Otero, File)

A June 19, 2012 photo shows a sign at a JC Penney store in Oklahoma City. The mid-price department store chain reported Friday Aug. 10, 2012, a bigger-than-expected loss and plummeting sales during the second quarter, as its customers remain confused by the new pricing strategy that ditched hundreds of sales in favor of every day lower prices. (AP Photo/Sue Ogrocki)

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NEW YORK (AP) — Shares of J.C. Penney Co. hovered near their 52-week low on Monday after an analyst downgraded the department store chain's rating on concerns that it will continue to face difficulties.

THE SPARK: Wayne Hood of BMO Capital Markets cut J.C. Penney to "Underperform" from "Market Perform" and reduced its price target to $12 from $18.

THE BACKGROUND: J.C. Penney just finished a year of mounting losses and declining sales amid a transformation plan spearheaded by its CEO Ron Johnson that has turned off some shoppers.

The Plano, Texas, company reported a dismal fourth quarter late last month, capping a year where Penney amassed nearly $1 billion in losses and saw its revenue plunge nearly 25 percent to $12.98 billion. Worries are growing that Penney won't be able to stem the losses in time to complete the transformation plan.

Under Johnson, J.C. Penney began a turnaround strategy that included ditching coupons and most of its sales events in favor of everyday low prices, bringing in hipper designer brands such as Betsy Johnson and remaking outdated stores by installing mini-shops to replace undifferentiated racks of clothing.

Johnson's goal was to reinvent J.C. Penney's business into a hip place to shop in a bid to attract younger, wealthier shoppers. But in the year since Johnson, the mastermind behind Apple's stores, rolled out his plan, once-loyal customers have strayed from the chain and it hasn't been able to get enough new shoppers to replace them.

To turn around the business, J.C. Penney last month started to resume sales and bring back coupons. J.C. Penney is counting on brands like Joe Fresh and a newly revamped home area, to be launched early April, to help attract shoppers. But investors fear Johnson won't be able to stem the sales decline in time to finish transforming the stores.

THE ANALYSIS: Hood said in a client note that he sees four possible outcomes for the retailer over the next 12 to 24 months. In the first scenario, Hood said J.C. Penney restores its sales growth, sells noncore assets, and pulls back on capital expenditures to become a bit profitable in the third quarter of 2013. In the second scenario, the analyst says the chain cuts capital spending, turns around its slump in revenue at stores open at least a year and posts moderating losses over the next five years.

Hood's third scenario envisions the company filing a voluntary bankruptcy in 2014 that allows the company "to aggressively and quickly right-size its business model into a smaller, more profitable J.C. Penney." In the fourth scenario, the analyst said J.C. Penney is forced into involuntary bankruptcy in either the first quarter or second quarter of 2014.

SHARE ACTION: J.C. Penney's stock fell 53 cents, or 3.4 percent, to $14.90 in morning trading. The shares slipped as low as $14.72 in earlier trading, which is not too far off from their 52-week low of $14.20. The stock reached a high of $37.46 almost a year ago, on March 27, 2012.